How The IBD 50 Can Help Investors Find Winning Stocks

When ordinary people talk about investing legends, they often see success as either genius or luck.

Both labels are distancing mechanisms. Such talk dismisses the chances of an ordinary person winning in stocks because most people are neither geniuses nor lucky.

So, how does the ordinary investor find winning stocks?

The IBD 50 is a good starting point. However, it is not a buy list. The stocks need to be researched.

Some people start with the chart, finding stocks that are shaping attractive bullish patterns and then checking the fundamentals. Others prefer to look at the fundamentals and then the chart.

It doesn't matter which you start with because the conclusion will be the same.

The key is to check both. IBD investors are not momentum investors who look solely at the chart, and they are not fundamental investors who ignore the chart. Both approaches are valuable.

Let's study the Nov. 21 IBD 50 and see how an investor might have culled the list. We chose this date because the market delivered a follow-through (a confirmation of a new uptrend) Nov. 23.

One way to cull the list is to take a red pen, look at the data listed in the chart and mark the negatives.

What deserves a red mark? Earnings and sales growth of less than 25%; a return on equity of less than 17%; low average volume; a weak Accumulation/Distribution Rating; and a lagging industry group.

A run through the IBD 50 with a red pen turned up a handful or two of stocks. But the charts also showed that three — Sturm Ruger (RGR), Ocwen Financial (OCN) and Lululemon Athletica (LULU) were either working on or had emerged from risky fourth-stage patterns. That left four stocks to consider.

Biotech Celgene (CELG) had one red mark — 14% sales growth in the then-most recent quarter. On Nov. 23, Celgene was still basing. An investor who put it on a watch list eventually found a chance to buy. The stock broke out in early January, clearing an 81.34 buy point and advancing as much as 46% in less than four months.

Valeant Pharmaceuticals (VRX) had one red mark — its laggard industry group. When the market uptrend was confirmed, the stock was working on a base. The stock broke out in December, clearing a 59.10 entry. Valeant advanced 29% in less than four months.

ARM Holdings (ARMH) had no red marks — unless you consider 24% quarterly sales growth too low. The stock, however, was already extended on Nov. 23. It did not offer a new entry.

3D Systems (DDD) had no red marks. The stock was buyable Nov. 23: It had bounced off the 50-day line in strong volume Nov. 19. The most recent base was third stage, which can be bought but is more prone to fail. In this case, it worked: 3D rose more than 70% in two months.

When ordinary people talk about investing legends, they often see success as either genius or luck.

Both labels are distancing mechanisms. Such talk dismisses the chances of an ordinary person winning in stocks because most people are neither geniuses nor lucky.

So, how does the ordinary investor find winning stocks?

The IBD 50 is a good starting point. However, it is not a buy list. The stocks need to be researched.

Some people start with the chart, finding stocks that are shaping attractive bullish patterns and then checking the fundamentals. Others prefer to look at the fundamentals and then the chart.

It doesn't matter which you start with because the conclusion will be the same.

The key is to check both. IBD investors are not momentum investors who look solely at the chart, and they are not fundamental investors who ignore the chart. Both approaches are valuable.

Let's study the Nov. 21 IBD 50 and see how an investor might have culled the list. We chose this date because the market delivered a follow-through (a confirmation of a new uptrend) Nov. 23.

One way to cull the list is to take a red pen, look at the data listed in the chart and mark the negatives.

What deserves a red mark? Earnings and sales growth of less than 25%; a return on equity of less than 17%; low average volume; a weak Accumulation/Distribution Rating; and a lagging industry group.

A run through the IBD 50 with a red pen turned up a handful or two of stocks. But the charts also showed that three — Sturm Ruger (RGR), Ocwen Financial (OCN) and Lululemon Athletica (LULU) were either working on or had emerged from risky fourth-stage patterns. That left four stocks to consider.

Biotech Celgene (CELG) had one red mark — 14% sales growth in the then-most recent quarter. On Nov. 23, Celgene was still basing. An investor who put it on a watch list eventually found a chance to buy. The stock broke out in early January, clearing an 81.34 buy point and advancing as much as 46% in less than four months.

Valeant Pharmaceuticals (VRX) had one red mark — its laggard industry group. When the market uptrend was confirmed, the stock was working on a base. The stock broke out in December, clearing a 59.10 entry. Valeant advanced 29% in less than four months.

ARM Holdings (ARMH) had no red marks — unless you consider 24% quarterly sales growth too low. The stock, however, was already extended on Nov. 23. It did not offer a new entry.

3D Systems (DDD) had no red marks. The stock was buyable Nov. 23: It had bounced off the 50-day line in strong volume Nov. 19. The most recent base was third stage, which can be bought but is more prone to fail. In this case, it worked: 3D rose more than 70% in two months.

See Also

The Big Cap 20 is showing itself to be a good representation of today's market leadership, as technology, health care and consumer stocks dominate the list. A glance of the IBD Smart NYSE + Nasdaq Tables shows chips, medical, apparel, retail and other technology sectors make up most of the top 10 ...

Celgene is a company built on a premise that would make most corporate executives shudder. The premise: find applicable uses for derivatives of thalidomide, a drug banned by the FDA in 1961 after causing tens of thousands of birth defects. But the rock-solid biotech stuck to its ...

The mortgage servicer said that it had received a notice from a trustee terminating its services for pools of securitized mortgage loans. The agreements represented $260 mil, 0.07% of Ocwen Financial's (NYSE:OCN) total portfolio. It added that the terminations stem from a default triggered when ...

With the market in a confirmed uptrend and distribution days falling off the count like flies, the performance of the IBD 50 has ramped up in recent weeks. For the week, the index of leading growth stocks rose 1.4%. The S&P 500 lost 0.3%. The IBD 50 was cushioned a bit Friday by a 13% gain in ...

02/27/2015 06:45 PM ET

More Investor's Corner Articles:

A stock chart never lies. Sometimes, however, the chart will mumble. Catching the chart's drift can be difficult under those circumstances. That's why the investor needs every chart-reading tool available. One key tool for stock chart analysis is the 10-week moving average line. As the individual ...

IBD readers will find many references to volume in market columns. Why? "Volume is your best measure of supply and demand and institutional sponsorship — two vital ingredients in successful stock analysis," IBD founder and Chairman William O'Neil wrote in "How to Make Money in Stocks." "Learn ...

Many investors are drawn to low-priced stocks like bears to honey. Truth is, it's an area of the market where institutional investors rarely fish. That means you shouldn't fish there, either. Prior to today, seven columns in this space have addressed the question: What makes a great base? Today's ...

A winning stock will typically advance in a predictable way. It rises from a first-stage base, moves higher, then builds subsequent bases, each one higher than the previous, until it finally tops. It doesn't take rocket science to understand that the breakout from a first-stage base in a new bull ...

For many successful stocks, a base's handle is the final preparation for a breakout. It's one of the last chances for a stock to make a good impression. So study it carefully. Why? The handle not only shapes the end of the base, it also sets the buy point and sways the chances of success or ...

Select market data is provided by Interactive Data Corp. Real Time Services. Price and Volume data is delayed 20 minutes unless otherwise noted, is believed accurate but is not warranted or guaranteed by Interactive Data Corp. Real Time Services and is subject to Interactive Data Corp. Real Time Services terms. All times are Eastern United States. *Reflects real-time index prices.